The otic placode, the anlagen of the inner ear, develops from an ectodermal field characterized by expression of the transcription factor Pax2. Previous fate mapping studies suggest that these Pax2(+) cells will give rise to both otic placode tissue and epidermis, but the signals that divide the Pax2(+) field into placodal and epidermal territories are unknown. We report that Wnt signaling is normally activated in a subset of Pax2(+) cells, and that conditional inactivation of beta-catenin in these cells causes an expansion of epidermal markers at the expense of the otic placode. Conversely, conditional activation of beta-catenin in Pax2(+) cells causes an expansion of the otic placode at the expense of epidermis, and the resulting otic tissue expresses exclusively dorsal otocyst markers. Together, these results suggest that Wnt signaling acts instructively to direct Pax2(+) cells to an otic placodal, rather than an epidermal, fate and promotes dorsal cell identities in the otocyst.